HONG KONG NYLON ENTERPRISES LTD. AND OTHERS v. QBE INSURANCE (HONG KONG) LTD.

HCCL 46/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.46 OF 1999

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J U D G M E N T

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THE CLAIM

1. On 23 April 1998 a large wooden box, containing a complex plastic-moulding machine, fell off the back of a trailer in Xiamen, Fujian Province when the vehicle hauling the trailer swerved to avoid another car. Considerable damage was caused. The machine was insured for this particular carriage with the defendant insurance company pursuant to two All Risk policies No.'s 01-7335130-MCG and 01-7335128-MCG dated 14 April 1998.

2. This case is about the plaintiffs' attempt to effect recovery under these policies. The 1st plaintiff, Hong Kong Nylon, was the seller of this machine and the Assured under the subject policies. The 2nd plaintiff, Beijing Ha Ha, was the end buyer and intended receiver of this cargo, and the 3rd plaintiff, China Songhai, was the import agent in respect of this transaction.

THE FACTUAL BACKGROUND

3. In October 1997 the 1st plaintiff, Hong Kong Nylon, exhibited at the China Plas Exhibition in Shanghai an ASB brand one stage biaxial orientation stretch blow moulding machine, together with its auxiliary parts. I shall refer to it simply as 'the machine'. It is Japanese-manufactured and engineered, and is used to produce plastic bottles of various types and shapes, most notably, for example, the large plastic bottles which hold the water reservoir used in drinking water fountains.

4. This machine, therefore, was an 'exhibition machine', in the sense that it had been removed from its factory packaging for the purpose of display and, equally, for the purpose of attracting potential buyers.

5. One such interested party was the 2nd plaintiff, Beijing Ha Ha, which in early October 1997 had agreed to purchase this machine at the time when it still remained at the Exhibition Centre in Shanghai. There was a problem with the financing of the purchase, however, in that Beijing Ha Ha then was in the process of reorganization, and could not immediately find the 30% deposit required by the seller, Hong Kong Nylon.

6. It was for this reason that the machine had to be transported back to Hong Kong for storage until such time as the deposit could be paid under the Sales Contract 97/866 with Hong Kong Nylon dated 7 October 1997.

7. The machine was shipped on board the vessel "ANDA 125" for carriage from Shanghai to Hong Kong on 31 October 1997. This shipment was insured with the defendant by Hong Kong Nylon, the latter having relatively recently commenced a commercial relationship with this insurer. Mr Hui Yuen of Hong Kong Nylon telephoned Mr Tony Tsang at QBE at a time when the machine was already on board the "ANDA 125" and secured insurance cover, in this instance an All Risks policy on Institute Cargo Clauses (A) terms, No.01-7316772-MCG, being issued on 30 October 1997.

8. The machine, as thus insured and shipped in wooden cases, arrived in Hong Kong on 3 November 1997, and on 11 November arrangements were made by Hong Kong Nylon with a forwarder named Dragon Form Holdings to collect the wooden cases from the depot in the New Territories and to transport them to Dragon Form's facilities for storage.

9. The auxiliaries to the machine did not come down from Shanghai on the same vessel. They were housed in three containers and were shipped down from Shanghai on 12 November 1997. When they arrived arrangements again were made, through Dragon Form, to collect the containers and to transfer them to their storage facilities; that which actually occurred was that the three COSCO containers which had been used were devanned on or about 21 November 1997, and the auxiliaries repacked into two other containers, thereby liberating the COSCO containers for return to that shipping line.

10. Although no claim was made on the defendant insurer in terms of the shipment of the machine from Shanghai to Hong Kong, the carriage did not pass entirely without incident. In December 1997 Dragon Form contacted Mr Francis Yee of Hong Kong Nylon and informed him that the base of one of the wooden boxes containing the machine had been damaged, and accordingly Mr Yee asked that the necessary repairs be effected to make the box fit for onward shipment.

11. In the interim some money had become available for the intended purchase of the machine. On 15 January 1998 China Songhai acting on behalf of Beijing Ha Ha signed a purchase agreement with Hong Kong Nylon to pay a deposit of US$414,000 by letter of credit, which was opened in March 1998 with the Bank of China. Thereafter, on 8 April 1998 an amended sales contract was signed making provision for full payment, the purchase price stated therein being US$1.1 million CIF China. Under this contract the place of delivery was to be Xiamen, and the time of delivery April 1998.

12. In light of this amended sales contract the necessity arose to make the relevant arrangements for shipment of the machine from Hong Kong to Xiamen, which is the leg of the machine's journey which has precipitated the present litigation. Instructions were duly given to Dragon Form by Hong Kong Nylon to prepare the shipping documents for onward transportation of the machine and its auxiliaries.

13. As with the Shanghai-Hong Kong leg, insurance for this carriage was required, and on 15 April 1998 Mr Hui Yuen of Hong Kong Nylon faxed an insurance application to Mr Tony Tsang of QBE for two policies of insurance in respect of this cargo, the requirement for two policies resulting from the particular mode of payment which had been adopted. On that day, 15 April, these two gentlemen had several telephone conversations. Recollection of the content of these conversations differs, and I deal with the differing contentions later in this judgment.

14. In the event, that which indubitably occurred as the result of the Hui/Tsang communications was that two All Risk policies of insurance were issued on ICC (A) terms, one policy, numbered 01-7335128-MCG, being for US$1.1 million, and the other, numbered 01-7335130, being for US$455,000. Both policies were back-dated to 14 April 1998.

15. As had been the situation on the downward shipment from Shanghai to Hong Kong, the machine itself was packed in two wooden boxes, with the auxiliaries being packed in two containers. A clean bill of lading was issued by Dragon Form dated 15 April 1998 showing that this cargo had been shipped on board in apparent good order and condition.

16. What then appears to have happened is that Dragon Form subcontracted the ocean carriage to Xiamen of the machine and its auxiliaries to an entity known as Fujian Province Xiamen Shipping Corporation ('FUXSC), which duly arranged to carry the cargo on board the vessel "MIN HAI 223".

17. However, at some stage unknown to Hong Kong Nylon, but evidently prior to loading the two wooden boxes and the two containers onto the vessel, Dragon Form decided to devan the containers and to carry the auxiliaries break bulk. There is no evidence before the court as to why this occurred it can be surmised that the "MIN HAI 223" was not a container vessel but it appears tolerably clear that this devanning took place without the knowledge of and in contravention of the instructions of Hong Kong Nylon. An additional element within this story is that on the bill of lading issued by the ocean carrier, FUXSC, damage was noted to the wooden boxes housing the machine.

18. The cargo arrived in Xiamen on 19 April 1998, although at this stage Hong Kong Nylon remained unaware that the auxiliaries had been carried break bulk nor, for that matter, that damage had been noted to the outside of the wooden cases.

19. The cargo was transported to the consignee's nominated warehouse on 23 April, and on the same day was loaded onto the trailer which shortly thereafter disgorged one of the wooden cases into the middle of a road in Xiamen as the carrying vehicle swerved in an attempt to avoid a taxi.

20. Surveys were carried out of the damaged machine which had been inside the box, and in due course a claim was submitted to QBE by Hong Kong Nylon and China Songhai.

21. On 19 June 1998 the defendant insurer rejected the claim by means of a letter of that date sent to Hong Kong Nylon. The reasons stated for rejection of the claim presaged the substance of the defences which have been advanced in this case.

22. Given the damage to the machine, Hong Kong Nylon subsequently returned it to the manufacturer, Nissei ASB Machine Company of Japan, for repair.

23. After repair, the machine was resold for US$620,000, a considerable dimunition from the purchase price, and the claim as now framed, for the principal sum of approximately US$870,000, represents both such loss as occurred on resale and also the cost of the repairs which were undertaken in Japan.

24. This litigation, therefore, is solely concerned with whether the defendant insurer should be ordered to pay all, or any part, of the sum thus claimed.

THE ISSUES

25. Having taken out 'All Risks' cover, the insured or its assignees clearly are entitled to be indemnified against the loss unless the defendant is able to demonstrate a legitimate reason for refusal so to indemnify.

26. Three specific defences are advanced: material non-disclosure, breach of warranty, and lack of insurable interest. In addition, if and in so far as these defences do not succeed, issues arise as to quantum. I deal with each element in turn.

(i) Material non-disclosure

27. In considering the issue of non-disclosure I bear in mind the established principle that a 'material circumstance' is one which would have an effect on the mind of a prudent insurer in estimating the risk, and that before an underwriter can avoid a contract for non-disclosure of a material circumstance it must be shown that actually he had been induced by such non-disclosure to enter into the policy on the relevant terms : see Pan Atlantic Insurance Ltd v. Pine Top Ltd [1995] 1 AC 501 (HL).

28. The material circumstances said by the defendant underwriter to have been undisclosed, notwithstanding knowledge thereof on the part of Hong Kong Nylon, are two-fold: first, that the machine had been exhibited at Shanghai, and thus was not new; and second, that there had been damage to the packaging on the Hong Kong-Xiamen leg of the machine's journey.

29. I deal with the second point first. The basis for this argument lies in the clausing on the memo bill of lading issued by the ocean carrier, FUXSC, on 17 April 1998. This bill of lading recorded shipment on board of two wooden cases and 27 packages, and thereon handwritten 'Remarks' have been added, the translation of the Chinese characters reading as follows :

"Two cases are damaged. The bottom of one of the cases is broken. Two main wooden girders at the bottom of that case are fractured.

2 crates of plastic particles [are involved in the accident]. The external packaging of 8 bags is damaged. 17 pieces of cargo have no packaging."

30. In my view this non-disclosure allegation does not assist the defendant.

31. I accept the evidence given by Mr Hui and Mr Yee of Hong Kong Nylon that they knew nothing whatever about this at the time - indeed, I accept further that they did not learn until well after the event that the containers specified in the Dragon Form bill of lading had been devanned, and the contents sent breakbulk on the "MIN HAI 223". So that there is here no question of the applicant for the insurance possessing knowledge of a material fact and failing to disclose it to the underwriter. Allied to this, Mr Sussex made the further valid point that in any event there is no evidence to suggest that the damage existed at the time of the inception of the risk.

32. The argument also was made in this connection that such damage to the packaging of the machine, even if known about by Hong Kong Nylon, was not a material fact. The insurance expert called on behalf of the plaintiffs, Mr Nicholas Gooding, expressed the view that such was not material and could not impact upon the insurance offered by QBE because the insurance as effected incorporated Clause 4.3 of the ICC(A), the terms of which exclude damage attributable to defects in packaging.

33. In light of the finding that the broken packaging was a fact unknown to Hong Kong Nylon at the time of the application for the insurance, strictly this point does not require decision. Suffice to say, however, that whilst Mr Gooding's views are always of interest, in this instance I am disinclined to accept his opinion, which in any event seems to me to represent a question of law as opposed to insurance practice, and thus remains exclusively a matter for the court. I find it difficult to accept the premise that the mere existence of an exclusion clause, such as Clause 4.3 in this instance, necessarily bears upon the issue of materiality. It seems to me that either a fact is 'material' within its accepted legal meaning, or it is not, and it is not easy to see why the existence of other contractual terms have much to do with it; in any event, in terms of the present case, the mere fact of damage to the wooden case or cases, which may (or may not) presage damage to the contents within, does not necessarily mean that any such damage may be attributed to the defects in packaging which are canvassed by Clause 4.3 of the ICC(A).

34. So I reject the first non-disclosure point. I turn now to deal with the main attack mounted by the insurer under the non-disclosure head, which I will term the 'exhibition point'.

35. On behalf of the plaintiffs, Mr Sussex SC accepted that the fact that that the machine had been exhibited at Shanghai, and thus was not new, was material. The 1st plaintiffs case here is that the defendant insurer indeed was told about this; to the contrary the defendant submits that this information was not given to it.

36. This point thus requires a factual determination by this court. It is common ground that the two persons involved in this particular dispute are Mr Hui Yuen of Hong Kong Nylon and Mr Tony Tsang of QEB, whose telephone conversations at the relevant time lie at the heart of this argument.

37. Mr Hui Yuen enjoys the title of 'Manager of Shipping and Banking' at Hong Kong Nylon, a position he has held since November 1969. He is now, he told the court, 77 years old. He gave evidence that he had told Mr Tsang, who was his contact within QEB for the purpose of insurance arrangements, that the machine was exhibition machinery at the time when he first had placed the risk for the initial leg of the machine's journey from Hong Kong to Shanghai. He stated that at that stage he had sent the defendant a copy of the bill of lading issued for that voyage (which Mr Tsang claims not to have seen) which on its face referred to the goods as "return exhibition goods". Thereafter, said Mr Hui, he had mentioned to Mr Tsang that the machine insured for the Hong Kong-Xiamen voyage was the same piece of exhibition machinery as previously insured. Mr Hui also said that he told Mr Tsang that the machine was to be shipped in the same wooden cases, bearing the same numbers as before.

38. For his part Mr Tsang's evidence was that whilst he had no positive recollection of the relevant telephone conversation, nevertheless he could not have been told of this by Mr Hui because his contemporaneous notes did not include reference to the machine being exhibition machinery. In addition to this denial, Mr Tsang stated that he also was told by Mr Hui that it was the machine that was in the containers and the auxiliaries which were in the wooden boxes, and that this was highly material because had he known the true position the risk would not have been underwritten.

39. The resolution of who said what is a nettle that has to be grasped, and in considering the probabilities I have reflected at some length both on the surrounding circumstances and upon the impression made upon the court by these two witnesses.

40. There is nothing in the papers which points clearly in one direction or the other. I do not place a great deal of reliance upon Mr Tsang's telephone jottings, which clearly were selective, even on his own version of events, and cannot exclude the possibility that he was told something material which he did not write down, particularly, as Mr Sussex submitted, if he did not himself then appreciate the significance in underwriting terms of what he was being told. Mr Sussex further suggested, in my view with ample justification, that whilst the provenance of this specific machine as 'exhibition machinery' may at that time not have struck Mr Tsang as being of any consequence, the present position is that he most certainly now does understand in light of its significance in this litigation, and indeed Mr Tsang's frequent references in his evidence to the 'second hand' nature of this machine tended to underscore this point.

41. Mr Sussex also argued that the defendant had insured the wooden cases on terms excluding the risks of denting, chipping, cracking and scratching, and that the evidence of Mr Gooding (whose expert opinion as to English insurance practice was the only opinion evidence on this subject which the court considered to be of assistance), was that these terms would not be appropriate if the defendant truly believed that the machine was new. At face-value this appears a promising argument, although the problem here is that this particular insurer appeared to place this exclusion on most of the risks it underwrote with the 1st plaintiff whatever the circumstances. So I hesitate to accord the significance to this point that otherwise it may have merited.

42. At the end of the day this may be one of those instances wherein the court's impression of the witnesses is more than usually relevant. In this connection there is no doubt in my mind that Mr Hui struck me as a truthful witness. Whilst Mr Hui is well past retirement age, I did not feel that his mental grasp had suffered, most particularly when it came to the detail of this case, with which clearly he was very familiar. I formed the impression that he took his work conscientiously and seriously, and notwithstanding an occasionally roundabout approach to questions, he clearly recalled what he had done and when. When all was said and done, I was left with the feeling that Mr Hui knew and took pride in his job, and in the context of this case that he was telling the unvarnished truth when he said that he had told Mr Tsang that the machine was exhibition machinery, not only at the time when the risk was placed for the voyage from Shanghai to Hong Kong, but also that at the time of placing the risk the subject of this action he had mentioned to Mr Tsang that the application referred to the exhibition machinery that previously had been insured, and that the machine was to be in the same wooden boxes bearing the same numbers as before. In fact, having observed Mr Hui's demeanour and obviously open nature, and taking into account the fact that this simply represented an onward journey for this same machine, in my judgment it would have been entirely natural for Mr Hui to have informed Mr Tsang of the circumstances.

43. My acceptance of Mr Hui's account of what passed between himself and Mr Tsang necessarily results in my rejection of Mr Tsang's evidence in this regard. Without wishing to be unkind, I was not impressed by Mr Tsang. I formed the firm view that his evidence represented an unfortunate elision of half-truth and prepared argument skilfully adapted to meet the demands of this case. I have little doubt on the probabilities that he knew that this was an 'exhibition machine', and I so find. Mr Hui initially had told him so at the time the risk was placed when the machine was sent down from Shanghai, and I consider it highly likely that he had received the bill of lading for that voyage, which Mr Hui said that he had sent to the defendant and which described the goods on its face as 'return exhibition goods'. Against this background, it would have been odd indeed if Mr Hui, a person of outgoing disposition, had not mentioned that the subsequent application to insure referred to the machinery from Shanghai the subject of the earlier insurance, particularly as at this stage this was only the fourth marine risk which had been placed with the defendant.

44. I further unhesitatingly reject Mr Tsang's assertion that he had been told by Mr Hui that it was the machine that was in the containers and the auxiliaries in wooden boxes. In the particular circumstances I do not consider it possible that Mr Hui would have said this, and in any event I formed the view that Mr Tsang well knew that these machines were large and irregularly-shaped, and indeed must have appreciated that fact since the time of the initial business meeting which he recounted he had held with Mr Yee of the 1st plaintiff, and at which the nature of Hong Kong Nylon's business first had been discussed; Mr Tsang agreed that at that meeting he had been given a brochure relating to these machines, and I reject also his self-serving assertion that he had not bothered even to look at it.

45. Acceptance of Mr Hui's account of events is sufficient to decide this element of the non-disclosure case advanced by the defendant. Had it been necessary, however, I would have accepted also the subsidiary argument advanced by the plaintiffs that in any event the defendant underwriter had failed to discharge the burden of showing that such non-disclosure would have impacted on its underwriting decision. Mr Sussex made two points in this context. First, that in the absence of evidence from Alan Cheung, the specific underwriter involved, it was reasonable nevertheless to infer that if the defendant had not been told that this was exhibition machinery it would have made no difference to the decision to assume the risk, and second, that by insuring on terms excluding the risk of denting, chipping, cracking and scratching, an exclusion entirely consistent with the fact that this was an exhibition machine, the defendant in any event had adequately protected itself against pre-existing damage.

46. Both points appear to me to have merit. It is common ground that this risk exceeded Mr Tsang's underwriting authority, and I do not accept his evidence that, absent reference to the underwriter involved, had he known of the provenance of the machine he immediately would have requested a pre-shipment survey prior to quoting terms. In an avowedly tight commercial insurance market, with the market participants eager for business, this strikes me as nonsense. Costs of such a survey (which generally is required to ascertain pre-existing damage) accrue to the assured's account, and it is unlikely to say the least that any prospective client would incur such costs without knowing the terms on offer.

47. It follows from the foregoing, therefore, that the non-disclosure defence is rejected in each of its manifestations.

(ii) Breach of warranty

48. The All Risks policies issued for the Hong Kong Xiamen leg bore on their face the following :

"Warranted that this is a container load shipment."

The existence of this clause has given rise to the second main line of defence relied upon by the defendant underwriter, which argues that this is a promissory warranty which, pursuant to section 33(3) of the Marine Insurance Act 1906, "is a condition which must be exactly complied with" whether or not material to the risk, with the attendant sanction that if not so complied with "the insurer is discharged from liability as from the date of the breach of warranty..."

49. Thus, the defendant's submission on the facts of this case is that it is clear that no containers actually were shipped, and that therefore by reason of the breach of this warranty the defendant insurer no longer was on risk.

50. To this submission Mr Sussex relied upon a number of arguments. His primary position was that the 1st plaintiff was entitled to rectification of the policies themselves because the warranty on their face was inserted by mutual mistake. This was a term inserted by the defendant's policy-issuing department absent reference back to the 1st plaintiff, and in any event, as Mr Sussex asserted, there is a patent contradiction between this so-called 'warranty' and the content of the policies, which on their face refer to a cargo composition of 'two (2) cases and two (2) containers only', with the marks and numbers thereof 'as per bill of lading'.

51. At first blush the rectification argument is not unattractive, not least because of what seems, on the basis of Mr Tsang's evidence at least, to be the apparently arbitrary practice of the defendant of including promissory warranties in policies without reference to the client applying for the insurance. Nevertheless I do not consider that on the facts of this case that this plea can succeed.

52. The doctrine of rectification rightly imposes an heavy burden upon the litigant invoking the draconian remedy, as here, of seeking to undo that which the parties appear mutually to have agreed and committed to paper, and in my judgment in this instance the 1st plaintiff has failed to discharge that burden. It is tolerably clear on the evidence that Hong Kong Nylon, the 1st plaintiff, specifically accepted the policies in the form in which it they were issued - in fact, at one point during cross-examination Mr Hui stated that he had not been surprised to see the existence of this warranty on the face of the policies - and indeed had paid the premium after receiving, and presumably checking, the terms of the documents as issued. Accordingly, in so far as there is room for argument in this case that the issue of the policies containing the warranty constitutes a counter-offer by the insurers, it seems to me that Hong Kong Nylon knowingly accepted this counter-offer, and any question of rectification thereby becomes a non-starter.

53. In addition Mr Smith SC pointed out that by a letter dated 7 August 1998 written to the defendant on behalf of Hong Kong Nylon by Messrs Toplis & Harding subsequent to rejection of the claim, no issue was raised as to the existence of the warranty now relied upon, the point made in that correspondence focusing on the fact that carriage by containers was limited to the accessories, and that it always was clear on the face of the insurance proposal form that "the main units of the machine" would require wooden cases since there was "no way" that they could be fitted into containers.

54. It follows that, in my judgment, the attempt to rectify does not succeed. The next argument raised by Mr Sussex was to question whether in the circumstances of this case this warranty was a true section 33 warranty, or whether it was a different animal, suggesting that it was difficult to give it any sense in the situation where plainly some of the goods were declared to be consigned in wooden cases, and some in containers. He further submitted that the word 'shipment' was ambiguous, in that it could mean either the act of shipping goods on board, or merely a consignment of goods intended for shipment, and that in cases of doubt, as was the case here, the policy wording must be construed contra proferentem, and that on its true construction this warranty meant only that the auxiliaries had to be in containers at the time of inception of the risk. If this be correct, he said, there had been no breach of warranty, and in any event the Dragon Form bill of lading stated expressly that the two containers were "shipped on board".

55. I do not consider that this latter bill of lading point has any weight. The fact that the bill of lading incorrectly records the true situation is regrettable but seems to me to be nothing to the point. Nor do I consider that the fact that part of this cargo consignment plainly was not to be containerized is decisive either. In the circumstances prevailing I interpret the warranty as appears on the face of the policies as a warranty that part of the consignment of insured goods (which we know to be the auxiliaries) was to be shipped in a container for the voyage from Hong Kong to Xiamen, and in my view it is difficult to justify a construction temporally limiting such warranty to the moment of inception of the risk.

56. If this construction be correct, therefore, undoubtedly there had been a breach, since it is accepted that no containers actually were shipped (the terms of the bill of lading notwithstanding), the two containers in question having been devanned by Dragon Form prior to being shipped on board and the contents thereafter shipped breakbulk on the "MIN HAI 223". Is this sufficient, as Mr Smith submitted, to get the defendant home, and to discharge the defendant from liability?

57. This is a far from attractive argument there was in this case no damage other than that to the machine packed within the wooden box, which of course never was to be containerised and Mr Sussex sought to meet it by reference to section 33(3) of the 1906 Act, relying on the fact that the discharge from liability of the insurer for less than exact compliance was stated to be "subject to any express provision in the policy", and that the policies in question in this case included Clause 8.3 of the ICC(A). This provides that the insurance shall remain in force "during delay beyond the control of the Assured, any deviation, forced discharge, reshipment or transshipment and during any variation of the adventure arising from the exercise of a liberty granted to shipowners or charterers under the contract of affreightment."

58. This provision, submitted Mr Sussex, was essentially an 'held covered' provision, so that if the event causing a prima facie breach of warranty is the exercise of a liberty by the carrier, the insurance remained in force. Accordingly, in this instance, by devanning the two containers prior to loading on board and shipping the auxiliaries break bulk on a break bulk vessel, Dragon Form purported to exercise the liberty contained in Clause 7(a) of its bill of lading to carry the goods "in any commercially reasonable manner and by any reasonable means...including the right to transship Goods using other Carriers, conveyances or containers".

59. Mr Smith argued that the liberty clause in the bill of lading was of no assistance to the plaintiff on the basis that, contrary to the statement on the face of the bill of lading, no containers actually were shipped on board the "MIN HAI 223", and, he asserted, because Clause 7(a) merely permitted the Carrier to use "other containers". However, I do not consider either of these objections is sufficient to defeat this point in light of the width of the clause in the bill of lading and the fact that its 'inclusionary' terminology does not exhaust that which is open to the carrier to do in the exercise of the contractual liberty.

60. On this basis, therefore, I accept the contention that the breach of warranty, which took place without the knowledge or instruction of the 1st plaintiff, occurred pursuant to the exercise of a liberty granted to the shipowner, and that the insurance thus remained in place as the breach was one within the parameters contemplated by Clause 8.3 of the ICC(A). If this be correct, therefore, it follows that the defence mounted on this basis fails also, and I so hold.

(iii) Lack of insurable interest

61. It is fair to say that, whilst apparent on the pleadings, the full ambit of this point emerged only during final submission. Mr Smith SC put the argument thus.

62. The assured, he said, must be interested in the goods the subject-matter of the insurance at the time of the loss: section 6, 1906 Act. In this instance, however, the 1st plaintiff had ceased to be interested in the goods by the time of the loss. Hong Kong Nylon was the CIF seller of this machine and its auxiliaries, the bill of lading had been indorsed and transferred to the buyers, who had taken delivery at Xiamen, and indeed at the time of the accident causing the damage the machine was on its way to the buyer's warehouse. Therefore only the 2nd and/or 3rd plaintiffs had an insurable interest at the relevant time.

63. Mr Smith further pointed out that in so far as to the two policies of insurance where concerned, only the 'smaller policy' that is, No.01-7335130-MCG in the sum of US$445,400 had been indorsed and assigned to the buyer, whereas the 'larger' policy No.01-7335128-MCG neither had been indorsed nor assigned by Hong Kong Nylon, and the fact that the seller had parted with its interest in the goods did not operate as an automatic assignment of its rights under the insurance: section 15, 1906 Act.

64. The situation as thus created had dual consequences, Mr Smith submitted. As Hong Kong Nylon, the 1st plaintiff, had no insurable interest at the time of the loss, it could not claim under either policy, and since the 'larger' policy was not indorsed nor assigned, neither the 2nd or 3rd plaintiffs could claim under that policy either. The result, therefore, is that in this case the only right to claim lay with the 2nd and/or 3rd plaintiffs solely under the 'smaller' policy.

65. Nor was this the end of the story, said Mr Smith. On the assumption that the sum insured in the 'larger' policy represented the insurable value of the goods (US$1.1 million), it followed that the sum insured as given in the 'smaller' policy (US$455,400) was substantially less than the insurable value of the goods, so that the effect of this under-insurance meant that the defendant insurer, if liable at all, could not be liable for more than a proportion of the loss, which in this case was 41.4% (455,400/1,100,0000.)

66. Mr Sussex disagreed with this analysis. His broad submission was that nowhere in the Marine Insurance Act 1906 could be found a definition of what constituted an 'insurable interest', and that in recent times this is a concept that has been expanding. He pointed in particular to section 5(2) of the 1906 Act which is in wide terms, and provides that :

"... a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof."

67. Adopting the views of the editors of Arnould on Marine Insurance (16th ed..) Vol III, at paragraph 332, Mr Sussex further submitted that the existence of an insurable interest is to be tested by whether or not the relationship between the assured and the subject-matter of the insurance is sufficiently close to justify his being paid in the event of its loss or damage, having regard to the fact that, if there were no or no significantly close relationship, the contract would be a wagering contract. In this connection he cited, also, the judgment of Deputy Judge Colman in The "Moonacre" [1992] Lloyd's Rep.501, wherein the learned judge analysed section 5 of the 1906 Act, and noted (at p.510) :

"There is thus in a wagering contract the essential feature that neither party has any interest in the outcome of a future uncertain event save for that amount which will be won or lost under the contract. Conversely, if the outcome of the future uncertain event upon the happening of which one party is entitled to be paid by the other would or might but for the contract cause loss or damage to the payee, then one essential characteristic of a wagering contract has gone and there is nothing in the Gaming Act, 1845 or in subsequent betting and gaming legislation which renders that contract void and unenforceable. Neither the words of any statute since 1845 nor any judicial pronouncement suggest that there should be a category of contracts of insurance which were not wagering contracts but which on account of the absence of an "insurable interest" should not be enforceable. Accordingly, in approaching the construction and application of s.5 of the Marine Insurance Act it is, in my judgment, right to proceed on the assumption that, provided the assured has sufficient interest in the subject matter of the insurance to prevent his contract being a wagering contract, he is entitled to enforce that contract." (emphasis added)

68. On the basis of this approach, Mr Sussex argued, in this case the 1st plaintiff clearly had an insurable interest in the subject-matter of the insurance at the time of the loss, bearing in mind that the contract of sale which existed between the 1st and 2nd plaintiffs was not a classic CIF contract wherein the 1st plaintiff had divested itself of its entire interest at the time of presentation of documents under the relevant letter of credit.

69. This case had a particular history, he said, in that the initial sales contract of 7 October 1997 had fallen through because of the inability of Beijing Ha Ha to raise sufficient funds for the deposit, which in turn had led to the machine being shipped to Hong Kong until the 2nd plaintiff (through the 3rd plaintiff) was able to open a letter of credit for payment of the deposit, the original sales contract thereafter being amended so that there then was in place a contract to buy the machine for US$1.1 million with delivery to take place in April 1998 at Xiamen.

70. However, although the price was expressed as a CIF price, this patently was not a normal CIF sale, in that within 90 days after delivery at Xiamen there was to be an inspection of the machine which was to be final and binding, and if the machine failed that inspection Hong Kong Nylon was to take it back. Hence the letter of credit which in fact was opened was for the deposit only of US$414,000, and under its terms Hong Kong Nylon was to present a draft drawn at 90 days after sight, which period no doubt was designed to link in with the inspection provision. Accordingly, Mr Sussex submitted, at the time when the machine fell off the lorry into the road in Xiamen the 1st plaintiff remained unpaid as to the full price, and there had been no inspection as agreed, so that on any view the 1st plaintiff stood to benefit from the safe arrival of the machine, and to suffer countervailing detriment if the machine was lost or damaged.

71. Against this particular factual background, which is essentially undisputed, I am unable to see why the relationship of the seller, Hong Kong Nylon, and the subject-matter of the insurance should be regarded as being insufficiently close so as to preclude the conclusion that at the time of the loss Hong Kong Nylon continued to have an insurable interest in the insured machine and its auxiliaries. The 'larger' policy under which the 1st plaintiff presently seeks recovery was not one made for other than ordinary business reasons, and, to adopt the approach of Mance J in The "Capricorn" [1995] 1 Lloyd's Rep.622, at 641, "if underwriters make a contract in deliberate terms which covers their assured in respect of a specific situation, a Court is likely to hesitate before accepting a defence of insurable interest".

72. In my view there is nothing in these circumstances which smacks of wagering, and I have little hesitation in finding that this purely technical objection as to a lack of insurable interest on the part of the 1st plaintiff is not well-founded and fails.

73. If this conclusion be wrong, I am inclined to agree with the alternative contention of Mr Sussex that if the 1st plaintiff indeed had divested itself of any insurable interest in the machine, then under a CIF contract Hong Kong Nylon must have contracted to provide an insurance policy for the value of the cargo, and thus expressly or impliedly must have agreed with the 2nd plaintiff purchaser to assign the 'larger' policy. A policy can be assigned after loss (section 50, 1906 Act), and in this situation of a prior agreement it thus remained open to the 1st plaintiff now to assign the policy to the 2nd plaintiff, Beijing Ha Ha which, by reason of the subsequent cancellation of the sales contract consequent upon the damage to the machine, and entry into a 'Discharge Contract and Payment Agreement' dated 26 January 1999, would then hold any sum recovered in this action on trust for the 1st plaintiff. I accept that possibly there may be consequential implications, for example in terms of costs, and that if the issue arose (which presently it does not) it would be necessary to hear the defendant on the point, but in principle I can see nothing wrong with this submission.

(iv) Quantum

74. If and in so far as his client were to be found liable (which I have now found to be the case), Mr Smith made two main submissions.

75. First, that such liability could not exceed the lesser of 41.4 % of the loss or the sum insured (US$455,400) under the 'smaller' policy. I am against him on this approach, which is premised on the lack of insurable interest/under-insurance argument which I have rejected.

76. Second, he argued that this is a case of partial loss, and that if this machine can be repaired and restored to its sound condition, then in principle the cost of the repair must be the sole measure of the loss. In other words, the dispute raised at this juncture is whether the assured can recover both the cost of the repairs and the dimunition in value of the machine as so repaired.

77. The undisputed facts are that Nissei ASB Machine Co. Ltd. rendered an invoice for repairs to the machine dated 13 July 1999 to Hong Kong Nylon in the sum of US$434,925, which has not been fully paid by the 1st plaintiff Mr Yee's evidence, which I accept, being to the effect that about half had been paid to-date, and that he had negotiated deferral of the balance pending the conclusion of this action.

78. Thereafter, the machine, as thus repaired, was resold to a third party buyer, Xiamen Yinlu Food Co. Ltd., by a contract dated 21 February 2001, for the sum of US$555,400, leaving a claimed loss on resale of US$344,600. The major elements of the present claim, therefore, constitute the repair cost and the resale loss, the total claim of US$872,983.77 also including a number of other incidental sums which, as I understand it, themselves are not the subject of dispute.

79. In terms of the issue of principle raised by the defendant, Mr Sussex submitted that it was clear that the machine had suffered severe impact damage when it fell from the lorry in Xiamen, and that whilst it could be restored to specification by the replacement of parts, it could not be (and in fact was not) marketed as a new machine.

80. The evidence of Mr Yee, Sales Director of Hong Kong Nylon, whose account of that which transpired (including his account of his telephone conversation from Xiamen with Mr Tsang, when the latter is said to have raised no dispute regarding the insurer's liability to pay) I accept in its entirety, was that whilst the machine was being repaired, and indeed subsequently, he had made numerous unsuccessful attempts to sell the machine, but that disclosure of the prior accident-damage had deterred potential customers and that eventually he had resold to the buyer, Xiamen Yin Lu Food, because that was the best offer that he had received. Even then, he said, subsequent problems had occurred with the machine and complaints had been received by Hong Kong Nylon.

81. For my part I did not understand the evidence of Mr Lutynski, the engineer who investigated the damaged machine and who was but briefly cross-examined, or indeed that of McLaren's Final Report of 30 June 1998 (of which I gather Mr Lutynski was the author), to import that notwithstanding the accident the machine had been restored to the 'as new' state it was in immediately prior to the accident. Nor did I understand Mr Yee's evidence to be that the Japanese manufacturer/repairer, Nissei ASB Machine Co. Ltd., had agreed to forego the balance of the outstanding repair debt, although it is clear that delay in making full payment had been accepted by Nissei pending the trial of this action.

82. In all the circumstances I can discern no reason why the plaintiff in this case should not be able to claim both the repair cost and dimunition in resale value, and I so hold.

83. The only aspect on quantum which did provide pause was Item 29 in the repair invoice for the sum of US$55,077.00, and which is stated to represent 'Reserve Fund For Parts'. Specific objection was raised by Mr Smith to this figure, which was not satisfactorily explained, and I remain unconvinced that this is an item for which the necessity for indemnity under the policy is justified and has been established; such a reserve fund for parts may well be applicable, and charged for, irrespective of damage to the machine. Accordingly, this item is disallowed from this claim.

ORDER

84. There is to be judgment in favour of the 1st plaintiff against the defendant in the sum of US$817,906.77.

85. I make an order nisi that interest on the said sum is to be paid at the rate of 2% over US dollar prime rate from the date of the issue of the writ herein, namely 18 March 1999 to the date of judgment herein, and thereafter at the judgment rate from time to time prevailing until payment.

86. I further make an order nisi that the defendant is to pay the costs of this action, such costs to be taxed if not agreed.